Supply Chain Improvements Will Resolve Clear Eyes Constraints And Stabilize Future Revenue

Key Takeaways

• Supply chain improvements for Clear Eyes and international expansion of Hydralyte promise revenue growth and market stabilization.
  
• Focus on debt reduction and share repurchases suggests improved EPS through lower leverage and strategic capital allocation.
  
• Supply chain issues, competitive pressures, and retail dynamics are impacting Prestige Consumer Healthcare's revenue, margins, and market share growth potential.

Catalysts

Develops, manufactures, markets, distributes, and sells over the counter (OTC) health and personal care products in North America, Australia, and internationally.

• Prestige Consumer Healthcare is strategically improving and diversifying its supply chain for the Clear Eyes brand, which should alleviate current constraints and lead to stabilized revenue growth in future quarters as supply issues are resolved.
  
• The Canadian segment continues to show robust sales growth, particularly driven by the Gaviscon brand, raising expectations for increased revenue contributions from the Canadian market.
  
• International growth, especially in the Hydralyte brand, is strong with double-digit consumption increases, which could drive higher revenues as the brand leverages its strong market position in Australia and expands internationally.
  
• The company’s focus on debt reduction and opportunistic share repurchases has lowered leverage, potentially leading to improved earnings per share (EPS) through reduced interest expenses and a lower share count.
  
• Strong free cash flow generation, supported by disciplined capital deployment and strategic investments, suggests that Prestige Consumer Healthcare can effectively fund both share buybacks and acquisitions to bolster future earnings and shareholder value.

Prestige Consumer Healthcare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prestige Consumer Healthcare's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.5% today to 20.5% in 3 years time.
• Analysts expect earnings to reach $246.1 million (and earnings per share of $5.06) by about January 2028, up from $205.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, up from 19.0x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 19.0x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Prestige Consumer Healthcare Future Earnings Per Share Growth

Risks

• Supply chain constraints, particularly with the Clear Eyes brand, are causing revenue declines and may continue to impact sales if not fully resolved. This could affect overall revenue growth if delays persist.
  
• The company experienced a decrease in revenue for the first half of the fiscal year, driven by supply constraints and changes in retail ordering patterns. Persistent supply issues could impact revenue and earnings.
  
• The gross margin decreased slightly due to expedited freight costs for the Clear Eyes brand, which could continue to affect net margins if supply chain issues persist and require further costly interventions.
  
• Exposure to potential store closures in the drugstore channel may impact distribution and revenue, as these changes in retail dynamics can alter consumer purchasing trends.
  
• Increasing competitive pressure, particularly in international markets with new entrants in categories like hydration solutions, may impact the company's ability to maintain market share, which could influence future revenue growth.

Valuation

• The analysts have a consensus price target of $85.29 for Prestige Consumer Healthcare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $246.1 million, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $79.35, the analyst's price target of $85.29 is 7.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.